Fortis – Change in ownership stuck in litigations


Company Name – Fortis Healthcare Limited (Fortis)


Current Share Price – INR 270 (April 25, 2022)


Market Cap – INR 20,388 cr


 

1. What is interesting about the stock?

Fortis was the crown jewel of the erstwhile promoters, Shivender Singh and Malvinder Singh (Singh brothers), who started the company in 1996. Singh brothers were also owners of Ranbaxy, India’s largest pharma company, which they sold to Daiichi Sankyo, one of the largest pharma companies in Japan. Mired by corporate governance issues, personal debt & litigations, the brothers lost control of Fortis. This story is a Bollywood potboiler.


Fortis Healthcare Limited (FHL) – an IHH Healthcare Berhad company – is a leading integrated healthcare services provider in India. It is one of the largest healthcare organizations in the country with 23 operational healthcare facilities in India and ~3,900 operational beds as of December 31, 2021. Fortis offers services to patients in Cardiac Care, Orthopedics, Neurosciences, Oncology, Renal Care, Metabolic diseases care, and mother and childcare. Healthcare verticals of the company primarily comprise day care specialty, diagnostics, and tertiary and quaternary care. The Company has entered women and child health and well-being segments through its brand, ‘La Femme’. SRL, a subsidiary of Fortis Healthcare, is among the leading diagnostic laboratory chains with 4 reference labs and 428 networking labs with 6,500 collection points.


The erstwhile promoters, the Singh brothers, who were involved in the diversion of funds and misrepresentation of financial statements, were forced to reduce their stake to less than 1% (Feb 2018) after the Supreme Court allowed lenders to invoke the pledge against shares of Fortis held as security. Thereafter, the search for a new promoter began, and bids were invited from investors. IHH was the winning bidder and became the new promoter, investing around INR 4,000 crore in the company against fresh issuance for around 31.1% stake at a share price of INR 170. IHH also plans to bring an open offer for acquiring up to a 26% stake in Fortis, subject to the subscription by the minority shareholders to the open offer. The open offer has not moved forward due to ongoing legal proceedings concerning the transaction. The apex court blocked the open offer on a plea filed by Japanese drugmaker Daiichi Sankyo, which is trying to enforce an INR 3,500 crore arbitration award it won in a Singapore tribunal against Fortis’ erstwhile promoters, the Singh brothers.


To reinforce complete dissociation with erstwhile promoters, the board has proposed to rename the Fortis brand as ‘Parkway’, which is a strong international brand belonging to IHH, while a neutral name will be considered for SRL. Change of change has not been implemented. Life has come full circle. In 2010, Fortis had acquired a 23% stake in Parkway Holdings from TPG Capital, which they sold to IHH after a failed takeover battle.


Hospital business contributed to ~75% of the revenue in Q3FY22 and surgical revenue was ~57% of the hospital revenue. Specialty mix in the hospital revenue in Q3FY22 was:

  • Cardiac – 20%

  • Onco – 11%

  • Neuro – 9%

  • Ortho – 8%

  • Renal – 7%

  • OPD – 12%

  • Others – 31%

Future Prospects


The new promoter is looking to turn around the operations, as it is generating returns below the cost of capital. IHH is also looking to avail synergies with key equipment suppliers, vendors, and lenders. The company has acquired RHT Health Trust which was created as a business trust listed in Singapore to own hospital assets. This would help in streamlining the operations.


However, turning around operations would be challenging for the new owner, with constant distraction from the litigation by Daiichi Sankyo.


Management Background


Dr. Ashutosh Raghuvanshi is a cardiac surgeon turned management leader. He joined Fortis in 2019 after IHH became a promoter. Over the last 26 years, he has been associated with the Bombay Hospital, Apollo Hospitals, Vijaya Heart Foundation, and Manipal Heart Foundation. Before joining Fortis, he was last working with Narayana Health as Vice Chairman, Managing Director & Group CEO and was responsible for the operations of all the group hospitals across India and internationally.


Vivek Kumar Goyal also joined in 2019. Before joining Fortis, Vivek was the Chief Finance Officer with the Tata Housing and Development Company in April 2015. He has previously worked with Ballarpur Industries, Saw Pipes, and Indo Asian Fusegear.


Strengths (Why invest in Fortis?)

  • Strong brand name in hospital and diagnostic business

  • New promoter is a premium healthcare provider operating in the home markets of Malaysia, Singapore, Turkey, and India. The group also has a growing presence in Greater China and an expanding network across Asia, and Central and Eastern Europe

  • Robust balance sheet after infusion of capital by the new promoter

Weakness

  • Litigation in the Supreme court is a distraction for the company and new promoters

  • Highly competitive industry

  • Regulatory actions like price capping or Government-mandated services can affect profitability

2. Key Historical Financials

  • Company saw revenue fall in FY21 but growth came back in the last few quarters, as the business got impacted by COVID-19

  • EBITDA margin has been steadily increasing due to focus on turnaround

  • PAT growth has been aided by debt repayment leading to lower interest cost

  • ROE and ROCE are below the cost of capital

Cash Flow Analysis


Working capital in the business is low so HCG would have high cash flow convertibility from EBITDA. I would expect Company to have an EBITDA of INR 240-300 cr in the next few years with cash outflow (CFI) predominantly for the replacement or maintenance capex. This would lead to cash available to reduce the debt level in the Company. The sale of the fertility business is expected to help in cash generation as a one-time.


3. What is my view on company valuation?


The company share price has run up 2x since March 2020 reflecting optimism about the business turnaround. IHH invested at the share price of INR 170 vs the current price of INR 270.


Fortis trades at an EV/EBITDA ratio of 20x vs Apollo Hospitals of 31x and Narayana Hrudayalaya at 23x. Valuation looks quite rich for a business that is expected to grow at 10-15% on revenue level and has weak ROE/ROCE (vs competition) with a difficult path to reach the cost of capital with occupancy level close to competition.


Investors should look for additional triggers for the turnaround before looking to invest in the Company.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Litigation overhang in the stock – distraction for the management and promoter

  • Minority shareholders, with a 31.5% stake in SRL, hold a put option of around INR 1,500 cr which could be due after February 2024

  • The Securities and Exchange Board of India (SEBI) and the Serious Fraud Investigation Office (SFIO) are investigating alleged financial irregularities at the company. Furthermore, on November 20, 2020, SEBI issued a show-cause notice to Fortis for alleged involvement in the diversion of funds by the erstwhile promoters and misrepresentation of the financials, thereby not safeguarding investor interests

  • Adverse government regulations

  • Limited availability of medical staff – could lead to an increase in cost pressure for quality resources

 

About the Author


I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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